I'm an analyst of technology, the global economy, and far more complex phenomena – my four young children. Through my firm Entropy Economics LLC, I research the growth of the Internet and the broadband networks and applications that drive it. I also study innovation around the world, especially in China, and frequently write about all these topics on the editorial page of The Wall Street Journal. For eight years I advised technology investors as executive editor of the Gilder Technology Report and after that was a senior fellow at the Progress & Freedom Foundation. I'm a scholar at the U.S. Chamber Foundation, a visiting fellow at the American Enterprise Institute's Center for Internet, Communications, and Technology Policy, and am also a trustee and vice-chair of the Indiana Public Retirement System (INPRS). Find me on Twitter @JBSay and @entropyecon.

Apple, Samsung Square Off Over Smartphones

In 2007, when AppleApple unveiled the iPhone, Samsung was still best known for its flat-panel televisions. Since then, Samsung has rocketed to the top of the smartphone world in terms of sales and units shipped and sparked an epic technological — and legal — rivalry.

In courtrooms around the world, Apple and Samsung are squaring off over mobile device patents. The skirmishes began in 2011, and today some 40 lawsuits still hang in the balance. The next battlefield is San Jose, where a trial in the Northern District of California begins on March 31.

According to Asymco, Apple’s iPhone represents an impressive 15% of all mobile units shipped around the world. But the iPhone enjoys nearly 40% of the revenue and an astounding 60% of industry profits. Samsung, meanwhile, accounts for around 50% of units shipped, 50% of revenue, and 40% of profits. Apple and Samsung, between them, take home 100% of the mobile handset industry profits.

Samsung Galaxy S4 – iPhone 4 (Photo credit: Janitors)

Apple has signed licensing deals with firms large and small, from MicrosoftMicrosoft and GoogleGoogle to Asian handset maker HTCHTC. But Samsung is far and away its largest competitor in mobile devices, representing an altogether separate ecosystem — Google’s Android operating environment. In previous trials Samsung was ordered to pay $929 million, and the International Trade Commission issued an import ban on Samsung products. After months of mediation on the current contentions, the two firms have not been able to reach an agreement. And so off to court we go, where a judge and jury will potentially determine the future of mobile device IP.

In recent years, the smartphone patent wars helped expose the growing problem of patent trolls — law firms that accumulate IP not to build things but to sue people. This winter Congress passed reforms to curtail the trolls’ worst abuses. And it’s a very good thing. But we still need more reforms aimed at the foundational problem: over-issuance of overly broad patents. Too many patents that cover too wide a swath of fairly obvious features lead to too many lawsuits. Large numbers of overly broad patents also devalue real patentable innovations that help drive the economy. We’ve previously called this a Gresham’s law of intellectual property — bad IP devalues good IP.

Apple is a true innovator. In our house right now I count four Macs, five iPhones, three iPads, and a fleet of old iPods. But Apple’s strategy of litigating its competitors into submission is at odds with the qualities that made it great. Apple holds large numbers of legitimate patents for true inventions. But our patent system has also encouraged firms to patent anything and everything, including beveled icons and touch-screen finger-swipes.

One of the five Apple patents at issue in the upcoming trial is the “slide-to-open” feature familiar on iPhones and iPads. Another is Apple’s “auto-correct” feature. It has also wrangled over its “pinch-to-zoom” finger swipe. Do these features contribute to Apple’s unique look-and-feel — what it calls the “Distinctive Apple User Experience”? Perhaps. But has Apple over almost four decades also been expert at imitating the innovations of others? No doubt.

Apple’s demands in this case are off the charts. Apple insists Samsung pay it $40 per phone or tablet, for a set of just five relatively minor software patents. This is perhaps 10 or 20 times, or more, what experts would expect. In previous litigation, it had suggested $30 per unit for its entire IP portfolio. A fee of that magnitude could upend the mobile marketplace by significantly driving up the prices of Samsung devices, which consumers clearly love. All this against the unsettling backdrop of whether some of these patents should be patents at all.

Corporate litigation is a fact of life. But the current environment is unhealthy. Silicon Valley long ago figured out cooperation often benefits everyone. Most companies in the mobile arena, like the semiconductor industry before it, are slowly but surely concluding that cross-licensing makes a lot more sense than never-ending courtroom brinksmanship, where judges and juries without much expertise can determine not just the fate of your business but, potentially, the structure of a whole IP environment.

The ITC, likewise, is not a good arena to settle these matters. If the ITC finds infringement, its usual remedy is an import ban. The bans are rarely overturned by Presidential findings, although Apple’s friends in Washington helped it secure a Presidential veto last summer when it was found guilty of infringement. Bans are an extreme and blunt tool in a complicated realm full of nuance. And if the patent in question should never have been issued, we’ve got a minor agency halting global trade and innovation on the basis of one poor decision by the Patent and Trademark Office.

Apple didn’t become great because of its lawyers. Neither did Samsung. Consumers around the world are hoping they settle their intense competition on the field of innovation, not in the courtroom.

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